Netflix's Fraud On Wireless Consumers

Last week, the poster child for net neutrality admitted to throttling its own videos for
AT&T’s and Verizon’s mobile customers, but not doing the same for videos watched by Sprint’s and
T-Mobile’s customers. According to
Netflix’s mea culpa, the company has been selectively throttling its videos on disfavored networks for over five years.

Self-styled consumer advocates instinctively defended the company, arguing that the throttling was not a violation of net neutrality because the rules do not apply to edge providers such as Netflix.

While technically true, this defense misses the point: Netflix never told its customers it was throttling the videos they paid to receive, which amounts to fraud. Netflix’s discriminatory throttling is also peak Washington hypocrisy, as the company adopted a holier-than-thou tone of moral outrage over the mere prospect that Internet service providers (ISPs) could do the same without strong net neutrality rules.

It is tempting to focus on the fraud that Netflix committed on the regulatory process: Netflix’s manufactured slowdowns are presumably designed to influence a gullible regulator with a penchant for mistrusting ISPs.

But the far more serious fraud—and potentially illegal conduct—has been committed on the competitive process, and by extension on wireless customers.

How so? Wireless customers choose their mobile carriers based on, among other things, price and service quality. Given the allure of original programs such as House of Cards and Orange Is the New Black, a bum rap for choppy Netflix videos could neutralize a wireless carrier’s otherwise superior reputation for network quality. Netflix’s deceptive practice provides consumers who prefer high-quality mobile video an artificial reason to churn from AT&T or Verizon, which distorts the competitive process.

Sprint’s and T-Mobile’s mobile networks have been associated with inferior network coverage and quality. To compensate wireless customers for this deficiency, the two smaller carriers traditionally were forced to price at steep discounts relative to AT&T and Verizon. By partially offsetting this disadvantage, Netflix’s favoritism of Sprint and T-Mobile permits the smaller carriers to price less aggressively, potentially leading to higher wireless prices.

There’s been a lot of noise about watching Netflix with BingeOn, getting your video in DVD quality to your video device. Now, either you’ve used it, and had no complaints, or you’re with the other guys and you’re saying “I’d never want that!” Well, here’s a little factoid for you. Did you know, that when you watch Netflix on T-Mobile, you get it at 480p? And the duopoly is actually delivering your Netflix content at 360p! I bet you didn’t know that! Go check. It’s true.

By “duopoly,” Mr. Legere was referring to AT&T and Verizon (as if Sprint and T-Mobile do not compete). Because Netflix failed to disclose to its customers that Netflix was orchestrating the selective slowdown, wireless customers—and even the CEO of T-Mobile—incorrectly inferred that AT&T and Verizon were to blame.

Why would Netflix wish to slant the competitive landscape in favor of Sprint and T-Mobile? After all, if the result of Netflix’s selective slowdown was to steer wireless customers away from AT&T and Verizon, or otherwise spare Sprint and T-Mobile price cuts to remain competitive with the others’ superior networks, how did Netflix benefit from its scheme?

When asked why Netflix does not limit its video quality at Sprint and T-Mobile, a Netflix spokesperson told the Wall Street Journal that “historically those two companies have had more consumer-friendly policies.” Translation: Sprint and T-Mobile did not oppose Netflix’s regulatory agenda, which involved reclassifying ISPs as common carriers so that any payments from edge providers to ISPs—from interconnection fees to paid priority to payments to get around a data cap—could be regulated out of existence. This punishment strategy for AT&T and Verizon, which continue to fight Netflix’s agenda, is something out of Frank Underwood’s playbook.

[Update: Notwithstanding its failure to disclose its policy, Netflix claims that its discriminatory treatment is justified because Sprint and T-Mobile offer plans where customers can exceed their caps without incurring fees, but instead suffer degradation in performance. But the precise method by which a carrier induces heavy users to purchase larger data plans is irrelevant. Fully informed customers should decide how to manage their data caps. Moreover, heavy users purchase large plans from the start (in which case the data cap is not binding), or watch Netflix on Wi-Fi (in which case the data cap is again irrelevant). For these reasons, Netflix's stated rationale for its discriminatory treatment is not persuasive.]

Secretly degrading the quality of its videos on AT&T’s and Verizon’s network has the added benefit of generating consumer complaints to the FCC. The agency is currently assessing whether these carriers’ “zero-rating plans” are in violation of the Open Internet rules. Because net neutrality decisions are so politicized, consumer outcry increases the chance of another regulatory win for edge providers, shielding Netflix from millions in potential fees to ISPs.

Remarkably, this unseemly episode marks the second occasion that Netflix has manufactured a network slowdown via a self-inflicted wound, with the presumed aim of influencing the regulatory process.

In the buildup to the FCC’s net neutrality rules in 2014, Netflix complained that wireline ISPs were throttling Netflix’s traffic at interconnection points. Although the claim turned out to be false—Netflix was actually pushing too much traffic through an indirect and undersized backbone path—the hysteria around Netflix’s fabrication gave consumer advocates a convenient rallying cry for regulating ISPs like common carriers.

Committing a fraud on the regulator is shameful. But committing a fraud on the competitive process is illegal. With luck, the Federal Trade Commission is monitoring this recidivist fraudster closely.

Twitter: @halsinger

I am a managing director at Econ One Research, an adjunct professor at Georgetown University’s McDonough School of Business, and a senior fellow at George Washington's Institute of Public Policy. I am the co-author of the e-book The Need for Speed: A New Framework for Teleco...